Essentials of Economics - Chapter 15 Flashcards

Flashcards covering key vocabulary from Chapter 15: Aggregate Demand and Aggregate Supply Analysis in Essentials of Economics Seventh Edition.

Aggregate demand (AD) curve

A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government (both inside and outside of the country).

Short-run aggregate supply (SRAS) curve

A curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms.

Wealth Effect

The effect where, as price levels rise, the real value of household wealth declines, resulting in less consumption.

Interest-Rate Effect

The effect where, when prices rise, households and firms need more money to finance buying and selling, leading to increased borrowing and higher interest rates, discouraging firm investment.

International-Trade Effect

The effect where, when U.S. price levels rise, U.S. exports become more expensive and imports become relatively cheaper, leading to a fall in net exports.

Monetary policy

Actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.

Fiscal policy

Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

Long-run aggregate supply (LRAS) curve

A curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied.

Sticky Prices and Wages

Prices and wages are said to be “sticky” when they do not respond quickly to changes in demand or supply.

Menu costs

The costs to firms of changing prices.

Supply shock

An unexpected event that causes the short-run aggregate supply curve to shift.

Stagflation

A combination of inflation and recession, usually resulting from a supply shock.

Monetary growth rule

A plan for increasing the quantity of money at a fixed rate that does not respond to changes in economic conditions.

Labor theory of value

A theory that attributed all of the value of a good or service to the labor embodied in it.